Nomura bullish on Zomato, pegs valuation at $1.4Bn

Nomura’s optimism surrounding Zomato is backed by its belief that the business is globally scalable and the network effects of its restaurant discovery platform enables monetisation in food ordering at low customer acquisition costsSupraja Srinivasan | ET Bureau | Updated: September 17, 2017, 12:27 IST

While both Zomato and Runnr CEO Mohit Kumar declined to comment on the financials of the acquisition, the deal values Runnr at close to $40 million.Japanese financial services company Nomura' India arm is bullish on the online restaurant discovery and food ordering firm Zomato’s growth trajectory, pegging its valuation at $1.4 billion by March 2019.

“The Street has valued Zomato at a discount to its last fund-raise valuation of $1 billion in September 2015…we conclude that the market’s valuation is too low. We raise our Zomato valuation to $1.4 bn (vs $1 bn earlier), valuing its advertising and food ordering businesses at 5.5 times and 6 times (over the next 5 years),” said the report by analysts Ashwin Mehta and Rishit Parikh of Nomura Financial Advisory and Securities (India) Pvt Ltd.

Nomura's optimism surrounding Zomato and its largest stake holder Info Edge sent the stock soaring to Rs 1,221.85/share with Info Edge closing 10.4% higher in trade on Friday.

Nomura’s mark-up of Zomato’s valuation comes more than a year after brokerage firm HSBC Securities and Capital Markets (India) had slashed the company’s valuation by half to $500 million raising concerns over the advertisement-heavy nature of Zomato’s business model, as well as the possible limitations over its ability to scale further.

HSBC declined to comment on Nomura's stance when contacted by ET. However HSBC's valuation for Zomato remains unchanged from the $500 million they had ascribed in April last year, said a person aware of the brokerage firm's workings.

Nomura’s optimism surrounding Zomato is backed by its belief that the business is globally scalable and the network effects of its restaurant discovery platform enables monetisation in food ordering at low customer acquisition costs, pegging revenues at $300 million by FY22.

Zomato’s valuation uptick by Nomura comes at a time when the company is in advanced talks to raise up to$200 million from Chinese e-commerce giant Alibaba and its payment affiliate Ant Financial, which ET had reported earlier this month. The deal could see Zomato being valued at $1.1 billion, higher than the $960 million it was valued at during its last fund raise in September 2015.

Interest of global players in Zomato points to a significant turnaround for the beleaguered food tech sector that struggled to raise funds until a year ago.

The deal, if it goes through, will be part of Alibaba and Alipay’s global play as Zomato has a strong presence in Southeast Asia and Middle East as well.

Zomato’s international play, especially in markets where competition is less, is being touted as a reason for the company’s ability to expand its topline. Nomura expects the Info Edge-backed firm to open up its food delivery services beyond the 3 countries it is currently present in. The company’s lower dependence on its delivery model for food ordering, which contributes 25% to its topline, is also one of the reasons for the optimism surrounding the firm.

However, post its acquisition of hyper logistics startup Runnr, Zomato is looking to self-fulfil about 50% of its orders from the current 8% over the next few months across its Indian and international markets, ET had reported on Wednesday.

Zomato competes with Swiggy in this space, which clocks 4 million orders per month, leading Zomato’s 3 million monthly order mark. While the report maintains that Zomato’s higher average order value of Rs 430 gives it an edge over competition, on a cumulative volume value basis, Swiggy leads despite a lower average order value of Rs 350 per order.

But besides Swiggy, Zomato also faces potential competition from global technology giants such as Uber and Google’s Areo which have entered the food delivery space recently.